Loan-to-Value – Why Your Property Is Worth Less to the Bank
Anyone financing a property quickly encounters three key terms: mortgage lending value, lending limit and loan-to-value ratio. Banks calculate these figures deliberately conservatively. This protects them – and influences your interest rate more than many borrowers assume.
Why Banks Value Conservatively
Banks carry long-term risk. They finance over decades and must remain stable even in volatile markets. For that reason, they do not rely on the current market price but determine a sustainable value designed to hold even in weaker economic periods.
This caution reflects the institutions’ own interest. It follows regulatory requirements such as the European Capital Requirements Regulation, which obliges credit institutions to apply risk-aware valuation standards Regulation (EU) No 575/2013.
For you, this means the bank calculates more defensively than the purchase price might suggest. This is not distrust toward the property. It is risk management.
Market Value and Mortgage Lending Value
In many cases, the starting point is the market value. It describes the price achievable under normal market conditions. In Germany, Section 194 of the Federal Building Code defines market value as the price obtainable in ordinary business transactions § 194 BauGB.
The mortgage lending value goes a step further. It excludes short-term price peaks and focuses on a long-term sustainable value. The German Mortgage Lending Value Regulation specifies this methodology BelWertV.
| Term | Focus | Typical Effect |
|---|---|---|
| Market Value | Currently achievable market price | Driven by supply and demand |
| Mortgage Lending Value | Long-term sustainable value | Usually below market value |
The difference becomes particularly visible during boom phases. This is where the conservative approach of banks clearly appears.
Lending Limit: How Far Does the Bank Finance?
Based on the mortgage lending value, the bank determines the maximum percentage it will finance. This threshold is called the lending limit. Many institutions operate between 60 and 80 percent of the mortgage lending value.
Financing beyond this range leaves the particularly secure area. This directly affects loan conditions.
Loan-to-Value Ratio
The loan-to-value ratio shows how high your loan is in relation to the mortgage lending value. Internationally, this figure is known as Loan-to-Value, or LTV.
It is calculated as follows:
Loan Amount ÷ Mortgage Lending Value × 100
| Loan | Mortgage Lending Value | LTV |
|---|---|---|
| €400,000 | €500,000 | 80 % |
The lower this ratio, the lower the perceived risk for the bank. Institutions typically reward this with more favorable interest rates.
Interest Rates and the Loan-to-Value Ratio
Banks often structure their interest rates according to LTV tiers. Thresholds vary between institutions, but the principle remains the same.
| LTV | Risk Assessment | Typical Impact on Interest |
|---|---|---|
| up to 60 % | very low | particularly favorable conditions |
| 60–80 % | moderate | standard conditions |
| above 80 % | elevated | possible risk premiums |
A few percentage points can translate into several thousand euros over the loan term. Managing your LTV actively therefore pays off.
Graphic: How the Terms Interact
The market value forms the starting point. The bank derives the mortgage lending value from it. Loan amount and mortgage lending value together determine the loan-to-value ratio, which significantly influences your financing conditions.
Conclusion: Conservative Valuation Means Managing Risk
Banks assess property values cautiously. They follow regulatory requirements and secure their long-term refinancing. From a business perspective, this approach is understandable.
For you as a borrower, this creates a clear action plan. Examine the mortgage lending value carefully. Manage your LTV through equity. Understand how each metric affects your financing.
Those who understand these relationships negotiate more effectively and make better decisions.
